Collapse in US consumer confidence sends global stock markets reeling

FTSE 100 ends the week 6% lower while European bourses also take a battering

European stock markets plunged yesterday after a survey of US consumers found them less confident over their future finances than economists had been predicting.

The data raised the spectre of a collapse in consumer demand before a fragile economic recovery could take firm hold. Yesterday's falls took the FTSE 100's decline this week to 6 per cent and left the index at a level last seen in late September, when the market began to recover from the effects of 11 September. It closed down 141.1 points, or 3 per cent, at 4,630.8 in heavy trading and, at one point, was off 200 points.

The French market ended down 2.9 per cent and Germany was more than 3 per cent lower when London closed.

Although markets had been sliding lower throughout the morning, a sharp fall in consumer confidence in the US exacerbated the falls. The University of Michigan consumer sentiment survey fell to 90.8 in June from 96.9 in May. Economists had been expecting a rise. In addition, the university's "current conditions index", which reflects Americans' perception of their present financial situation and, therefore, their willingness to spend, fell to 97.9 from 103.5 in May. The data came a day after disappointing US retail sales figures.

The Dow Jones Industrial Average slumped 241 points shortly after the news, although it later clawed back ground to end down 28.6 at 9474.2.A 0.2 per cent rise in US industrial production in May was also lower than expected. And increasing tension in the Indian subcontinent and over Iraq fed the febrile atmosphere.

"Today the market feels worse than last September," said one investment director in London. "At least then you knew why the market was going down, there was a reason. Now there are lots of stories around.... I am just trying to protect my clients." For long periods there were no risers on the FTSE 100 trading screens.

Few analysts expect a swift rebound, arguing that UK shares still do not look cheap. There is also some scepticism that even current earnings estimates can be met. Earnings growth in the coming year is expected to be around 11 per cent, according to the total of analysts forecasts on individual companies, but strategists do not believe economic growth will be sufficient to deliver these results.

Darren Winder, a strategist at UBS Warburg, which has recently revised down its year-end FTSE 100 target to 5,500, said it was not clear that the early signs of economic revival were anything more than a restocking of industrial inventories run down after 11 September.

"We have seen an improvement in output, but we have not yet seen an improvement in demand. If consumption growth slows then it is likely demand will actually moderate, rather than accelerate," Mr Winder said.

He said that corporate earnings would be hit if interest rates are raised to choke off consumer demand and house price inflation ­ as threatened by the Bank of England this week.

The threats to household finances from rising taxes and interest rates have left investors nervous over the prospects for the banks, the UK's biggest stock market sector by value. Other heavyweight sectors also look unattractive. The pharmaceuticals giants GlaxoSmithKline and AstraZeneca face the loss of patents on their biggest-selling drugs. The prospects for oil companies are clouded by uncertainty over levels of demand and tensions in the Middle East. And telecoms continue to suffer.

Steve Russell, a strategist at HSBC Securities, said that, given the uncertainty, investors are taking their profits in sectors such as housebuilding. "We know institutions have low cash levels, because they were fully invested at the start of the year, and they are raising cash ahead of what they expect will be a jittery third quarter," he said.